Category Archives: Investing Money

Maintain a Level Playground

money mazeMy Comments: This is about a soon to be imposed rule that applies to those of us who provide professional advice about the money you are accumulating for your retirement. It’s called the Department of Labor Fiduciary Standard rule and it’s long overdue.

As a financial planner, my role is to identify the existential threats you face in retirement and help you find solutions. For this I get paid from time to time. It might be instructive to understand the reason why I believe the rule is needed and ultimately expanded. With Trump now in the White House, there’s going to be shouting all up and down Wall Street to get rid of it.

Here’s some deep background. The greatest economic threats to the health and welfare of the world I leave to my grandchildren will come from income inequality or the disparity between the haves and the have-nots. I’ve written about this before and will again.

This income inequality is pervasive across the planet. I believe it’s the root cause of almost all conflicts between countries and their respective societies. If the disparity is great enough, economic incentive to succeed diminishes and society unravels. Why go on jihad and kill a bunch of infidels if you already have a good job, have plenty to eat and a home in which to raise your children?

Early last century, a political movement surfaced that we called communism. It arose in Russia and the Soviet Union and said ‘to each according to his needs’. It was a rejection of free enterprise and capitalism, which at the time said every individual has the ability to rise above others and have ‘more than what he needs’.

However, the intervening years proved that without an economic incentive, individuals rarely rise to any level, never mind enough to satisfy their needs. Without the ability to dream of success, people simply fail if there is no motivation to excel.

The other side of the argument says capitalism provides an unfettered ability to ‘succeed’, and at the extreme, allows total disregard for the aspirations and dreams of others playing the same economic game. Any barrier imposed by society to limit unfettered ability is deemed contemptible and must be removed.

But society, by definition, includes rules that we’ve come to accept as being in the best interest of society. We have no issue being required to drive on one side of the street, as opposed to whichever side we like on any given day. We have rules against stealing and causing bodily harm. These rules are accepted and no one argues against them. But suggest that bankers and stock-brokers be required to act in their clients best interest, with rules and regulations and penalties if you don’t and before you know it, the wailing starts.

A fiduciary standard says you are legally required to provide advice that is in your clients’ best interest. It’s not about denying some the opportunity to succeed any more than it’s about making sure none of us ‘has more than we need’. I should not be allowed to steal from you by giving you advice that is in my best interest and not your best interest. I may not ‘earn’ quite as much, but I will not suffer either.

This new rule is but one step on the playground of life that I hope will work to diminish the economic disparity I spoke about above. That effort has to start with a level playing field. It’s in the best interest of society and can happen within the context of a capitalist framework.

Theo Anderson | December 29, 2016

The income gap between the classes is growing at a startling rate in the United States. In 1980, the top 1 percent earned on average 27 times more than workers in the bottom 50 percent. Today, they earn 81 times more.

The widening gap is “due to a boom in capital income,” according to research by French economist Thomas Piketty. That means the rich are living off their wealth rather than investing it in businesses that create jobs, as Republican, supply-side economics predicts they would do.

Piketty played a pivotal role in pushing income inequality to the center of public discussions in 2013 with his book, “Capital in the Twenty-First Century.” In a new working paper, he and his co-authors report that the average national income per adult grew by 61 percent in the United States between 1980 and 2014. But only the highest earners benefited from that growth.

For those in the top 1 percent, income rose 205 percent. Meanwhile, the average pre-tax income of the bottom 50 percent of workers was basically unchanged, stagnating “at about $16,000 per adult after adjusting for inflation,” the paper reads.

It notes that this trend has important political consequences: “An economy that fails to deliver growth for half of its people for an entire generation is bound to generate discontent with the status quo and a rejection of establishment politics.”

But the authors also note that the trend is not inevitable or irreversible. In France, for example, the bottom 50 percent of pre-tax income grew by about the same rate — 32 percent — as the overall national income per adult from 1980 to 2014.

The difference? In the United States, “the stagnation of bottom 50 percent of incomes and the upsurge in the top 1 percent coincided with drastically reduced progressive taxation, widespread deregulation of industries and services, particularly the financial services industry, weakened unions and an eroding minimum wage,” the paper reads.

President-elect Donald Trump’s administration promises at least four years of policies that will expand the gap in earnings. But a few glimmers of hope are emerging at the local level.

The city council of Portland, Oregon, for example, recently approved a tax on public companies that pay executives more than 100 times the median pay of workers. The surtax will increase corporate income tax by 10 percent if executive pay is less than 250 times the median pay for workers, and by 25 percent if it’s 250 and over. The tax could potentially affect more than 500 companies and raise between $2.5 million and $3.5 million per year.

The council cited Piketty’s “Capital in the Twenty-First Century” in the ordinance creating the tax. Steve Novick, the city commissioner behind it, recently wrote that “the dramatic growth of inequality has been fueled by very high compensation of a few managers at big corporations, as illustrated by the fact that 60 to 70 percent of people in the top 0.1 percent of income in the United States are highly paid executives at large firms.”

Novick said that he liked the idea when he first heard about it because it’s “the closest thing I’d seen to a tax on inequality itself.” He also said that “extreme economic inequality is — next to global warming — the biggest problem we have in our society.”

Investing in children

There is also hopeful news in the educational realm. James Heckman, a Nobel Laureate in economics at the University of Chicago who has spent much of his career studying inequality and early childhood education, recently published a paper that lays out the results of a long-term study.

In “The Life-cycle Benefits of an Influential Early Childhood Program,” Heckman and others report that high-quality programs for children from birth to age 5 have long-term positive effects across a range of metrics, including health, IQ, participation in crime, quality of life and labor income.

Predictably, perhaps, the effects of the programs weren’t limited to children. High-quality early childhood education also allowed mothers “to enter the workforce and increase earnings while their children gained the foundational skills to make them more productive in the future workforce,” a summary of the paper reads.

“While the costs of comprehensive early childhood education are high, the rate of return of [high-quality programs] imply that these costs are good investments. Every dollar spent on high quality, birth-to-five programs for disadvantaged children delivers a 13 percent per annum return on investment.”

The research is important because early childhood education has bipartisan support. Over the summer, the Learning Policy Institute released a report that highlighted best practices from four states that have successful early childhood education programs. Two of them — Michigan and North Carolina — are swing states in national politics. The others are Washington and a solidly red state, West Virginia.

Although it isn’t a substitute for other policy tools to address inequality, like progressive taxes, early childhood education has strong bipartisan support because it produces measurable payoffs for both children and the economy. One study found, for example, that the economic benefit of closing the educational achievement gaps between children of different classes would be $70 billion each year.

Early childhood education fosters an “increasingly productive workforce that will boost economic growth, provide budgetary savings at the state and federal levels, and lead to reductions in future generations’ involvement with the criminal justice system,” the Economic Policy Institute recently noted. “These benefits will, of course, materialize only in coming decades when today’s children have grown up. But the research is clear that they will materialize — and when they do, they are permanent.”

The Trump effect has rallied US markets – but it’s based on illusion

bear-market-bearMy Comments: Well, today is Monday. I wonder what the markets will do today. This appeared last Thursday, from a highly respected economist whose thoughts I value.

I’ve been keeping my money, and that of others for the past few months, in cash. My assumption has been that we are overdue for a correction of significance and I’d rather lose a little on the upside than a whole lot on the downside.

Keep your fingers crossed.

Robert Shiller / January 19, 2017

Speculative markets have always been vulnerable to illusion. But seeing the folly in markets provides no clear advantage in forecasting outcomes, because changes in the force of the illusion are difficult to predict.

In the US, two illusions have been important recently in financial markets. One is the carefully nurtured perception that President-elect Donald Trump is a business genius who can apply his deal-making skills to make America great again.

The other is a naturally occurring illusion: the proximity of Dow 20,000. The Dow Jones Industrial Average has been above 19,000 since November, and countless news stories have focused on its flirtation with the 20,000 barrier – which might be crossed by the time this commentary is published. Whatever happens, Dow 20,000 will still have a psychological impact on markets.

Trump has never been clear and consistent about what he will do as president. Tax cuts are clearly on his agenda, and the stimulus could lead to higher asset prices. Lower corporate taxes are naturally supposed to lead to higher share prices, while cuts in personal income tax might lead to higher home prices (though possibly offset by other changes in the tax system).

But it is not just Trump’s proposed tax changes that plausibly affect market psychology. The US has never had a president like him. Not only is he an actor, like Ronald Reagan; he is also a motivational writer and speaker, a brand name in real estate, and a tough deal maker. If he ever reveals his financial information, or if his family is able to use his influence as president to improve its bottom line, he might even prove to be successful in business.

The closest we can come to Trump among former US presidents might be Calvin Coolidge, an extremely pro-business tax cutter. “The chief business of the American people is business,” Coolidge famously declared, while his treasury secretary, Andrew Mellon – one of America’s wealthiest men – advocated tax cuts for the rich, which would “trickle down” in benefits to the less fortunate.

The US economy during the Coolidge administration was very successful, but the boom ended badly in 1929, just after Coolidge stepped down, with the stock-market crash and the beginning of the Great Depression. During the 1930s, the 1920s were looked upon wistfully, but also as a time of fakery and cheating.

Of course, history is never destiny, and Coolidge is only one observation – hardly a solid basis for a forecast. Moreover, unlike Trump, both Coolidge and Mellon were levelheaded and temperate in their manner.

But add to the Trump effect all the attention paid to Dow 20,000, and we have the makings of a powerful illusion. On 10 November 2016, two days after Trump was elected, the Dow Jones average hit a new record high – and has since set 16 more daily records, all trumpeted by news media.

That sounds like important news for Trump. In fact, the Dow had already hit nine record highs before the election, when Hillary Clinton was projected to win. In nominal terms, the Dow is up 70% from its peak in January 2000. On 29 November 2016, it was announced that the S&P/CoreLogic/Case-Shiller national home Price index (which I co-founded with my esteemed former colleague Karl E Case, who died last July) reached a record high the previous September. The previous record was set more than 10 years earlier, in July 2006.

But these numbers are illusory. The US has a policy of overall inflation. The US Federal Reserve has set an inflation “objective” of 2% in terms of the personal consumption expenditure deflator. This means all prices should tend to go up by about 2% per year, or 22% per decade.

The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.

The Fed, like the world’s other central banks, is steadily debasing the currency to create inflation. A Google Ngrams search of books shows that use of the term “inflation-targeting” began growing exponentially in the early 1990s, when the target was typically far below actual inflation.

The idea that we actually want moderate positive inflation – “price stability,” not zero inflation – appears to have started to take shape in policy circles around the time of the 1990-91 recession. Lawrence Summers argued that the public has an “irrational” resistance to the declining nominal wages that some would have to suffer in a zero-inflation regime.

Many people appear not to understand that inflation is a change in the units of measurement. Unfortunately, though the 2% inflation target is largely a feelgood policy, people tend to draw too much inspiration from it. Irving Fisher called this fixation on nominal price growth the “money illusion” in an eponymous 1928 book.

That doesn’t mean that we set new speculative-market records every day. Stock-price movements tend to approximate what economists call “random walks,” with prices reflecting small daily shocks that are about equally likely to be positive or negative.

And random walks tend to go through long periods when they are well below their previous peak; the chance of setting a record soon is negligible, given how far prices would have to rise. But once they do reach a new record high, prices are far more likely to set additional records – probably not on consecutive days, but within a short interval.

In the US, the combination of Trump and a succession of new asset-price records – call it Trump-squared – has been sustaining the illusion underpinning current market optimism. For those who are not too stressed from having taken extreme positions in the markets, it will be interesting (if not profitable) to observe how the illusion morphs into a new perception – one that implies very different levels for speculative markets.

• Robert Shiller is a 2013 Nobel laureate in economics, professor of economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance

The Basics of Investing

investment-tipsMy Comments: This is brilliant. It comes from Rod Rehnborg who is based in Hong Kong. Too often, people in my profession start out in the weeds and drag the reader further into the weeds with every word they write. Before long you have no idea what is going on.

For some of you this may be too basic. But I encourage you to read this before you take the next step, whatever that might be.

Here’s what Mr. Rehnborg has to say:

Given stories of gigantic “ponzi schemes,” bank failures, and obscene Wall Street bonuses, the thought of handing over your hard-earned money to the financial industry is not very appealing. And, as a result, most people I meet wonder what to do with their shriveled, shrinking, nest egg. Of course, the answers to that all-important question are as numerous as there are nest eggs out there. Nevertheless, it may make sense to “hit the reset button,” and reflect on the very basics of investing.

Why do we save?

A generation ago, people use to save towards the purchase of a good—a TV, car, washing machine, home, etc. But this changed with the advent of the credit card, the auto loan, and second mortgages. Instant gratification was invented and we could pay for the goods AS we enjoyed them, not BEFORE. The birth of consumer loans also meant that there were now only two reasons to save: 1) for a rainy day and 2) for when we grow old and can no longer work but still need to consume.

In other words, the most common reason we save today is to pay for something much later (i.e.: retirement). Thus, the important thing is to have the money we save now grow in such a way that it will match up with the cost of those things we will want to pay for later. There are two things to consider: 1) how much our investment is going to grow and 2) how much the price of the things we will want to pay for in the future will be.

The price something will be in the future depends largely on how much inflation there will be. If our savings do not earn the same percent return as the inflation rate, then we are actually growing poorer even as we save. So the first question as savers we should ask ourselves is what the likely future inflation rate will be.

Inflation: What causes it?
Basically inflation is determined by how much money is available in the economy. And this amount of money is largely determined by how much people get paid for work and how easy it is to borrow money. Since wages have not gone up much in recent years, and the current job market is terrible, and given how hard it is to borrow money because of the financial crisis, there is not much chance that inflation will increase in the next year or two at least. In fact, the bigger worry right now is DEFLATION.

What’s the problem with deflation? The big problem with deflation can be easily understood by looking at a home financed with a mortgage. If you borrowed money for a house and the house drops in value because the cost of everything is dropping, you still owe the same amount of money but the house is worth less. When we enter into deflation, all people want to do is save money to repay debt. Economists call this the “paradox of thrift” in that savings is a “good thing,” but if everyone saves at the same time, then it can have negative effects for the overall economy.

So, what is the best way to save for the future in a deflationary environment? That’s pretty easy: Just leave your money in the bank and watch its purchasing power grow as the prices of everything else fall. A very forward thinking Japanese person in 1990 who was planning to purchase a house in 2009, only needed to leave his or her money in the bank as house prices just hit a twenty-four year low in Japan!

In order to fight off deflation, the US government is scrambling to bail out financial companies in the hope that they will lend more, and is also coming out with “stimulus packages” of government spending to pump into the economy so that more people get wages. In turn, all this government activism is raising the fear that inflation could rise dramatically in the future. Why? Because governments around the world are promising to pay for lots of things; and the way governments pay for things is either by borrowing the money by selling bonds or, if not enough people want to buy this government debt, by printing actual money to buy their own debt. But for the moment at least governments are losing the battle against deflation as people are paying down their debt faster than the government can print money and inject it into the economy.

Let us now look at some main types of investments to see how they fit into the inflation/deflation picture.

Stocks
Stocks are simply a way to own a piece of a business that will be earning profits that should, on average, grow at or above the rate of inflation. When you buy a stock you are essentially passing your extra money forward to someone else who needs it and who will hopefully be good stewards of it by using it to invest in the equipment and people and other assets required to grow their business.

Bonds
A bond is just a loan to either a government or company. The main concern with bonds is whether the borrower will be able to pay you back and what interest rate you will receive. Now, there is a big debate about US Federal government bonds (a.k.a.“treasuries”). These bonds have no risk of you not getting your money back since the government can always raise taxes or even just print money to pay you back. However, it is by no means certain whether government bonds will be a safe investment or a horrible one—it all depends on whether there is inflation or deflation. The current interest rate you receive on bonds is very low, but you will be happy with even a small return on your money if there is deflation and the cost of living drops. It seems that buying government bonds now is really a game of chicken, and best left to professional speculators, which is ironic since government bonds are supposed to be among the safest of investments.

Commodities

Commodities are goods that we, as a society use in our daily lives (oil, gold, food, etc.), a.k.a. “stuff.” The idea is that the prices of this “stuff” will rise in line with inflation and if you think the world might be running out of “stuff,” then maybe the prices will rise even faster than inflation. When talking about commodities, it’s important to keep in mind that demand for most of them will fluctuate in line with the economy. So when the economy is strong, there is generally more demand for “stuff” like oil and copper. The one commodity that is different from the others is gold. Gold has been used for ages as the ultimate store of value, since aside from its good looks it is extremely hard to dig out of the ground and thus there is never going to be any meaningful increase in supply of it. There is also not much practical use for it either so its predominant purpose is as a money substitute.

While in theory gold should hold its value against inflation, the reality is that historically gold has just barely kept up with inflation and has performed much worse than stocks and bonds over the long term. If you are determined to invest in something that will hold up amidst inflation, consider a vegetable garden or solar panels. The money spent on creating a source of food and electricity for yourself will pay off handsomely if inflation drives food and energy prices higher.

Hedge funds
Recently, it seems like hedge funds are vying with terrorists for public scorn, but let’s have a quick look at what they actually do. Most hedge funds use those basic assets discussed above, but do things with them so that the return is different than the assets themselves. The result is that the returns that hedge funds deliver will be different than what you would receive if you owned the stocks, bonds, or commodities themselves. Investors give hedge funds lots of money to manage because investors value the diversification provided by hedge funds. There is actually a useful social purpose for hedge funds in that they help keep money flowing around the financial markets so that companies with good ideas can raise money to expand their businesses even when financial markets are weak.

So that’s a brief and totally non-comprehensive overview of some of the issues worth considering amidst all the chaos and emotion of investing these days. There are no easy answers, although a mix of stocks, hedge funds, and vegetable gardens seems sensible to me.

—Rod Rehnborg manages an investment fund for institutional clients at Marshall Wace GaveKal. His specialty is “market neutral” investment strategies in Japanese stocks that deliver returns with low correlation to the stock market. He is based in Hong Kong.

Market Insanity Reaches Record-Highs As Investors Flock Into The Biggest Bubble In History

My Comments: So much for being an optimist. There’s a point where it simply makes sense to take your money off the table and put it under the mattress. At least for a while.

The markets are being driven by those who are convinced Donald Trump is the second coming. These folks seem convinced that ‘this time it’s different’ and that corporate earnings are going to go through the roof. Life NEVER moves in a straight line.

Dec. 15, 2016 | Steve St. Angelo

Investors have forsaken all reason, logic and wisdom by rushing into the biggest stock and financial bubble in history. Even some precious metals investors are selling their gold and jumping into the markets hoping to make big profits as President Trump takes over the White House in six weeks.

Unfortunately, the worst time to jump into a market is when everyone else is doing the same thing. Of course, this doesn’t mean the Dow Jones Index won’t continue higher for some time, but the fundamentals of the economy continue to rot from the inside out.

No one really notices this as automobile dealers are now selling cars with zero interest rates, nothing down and no payment for 6 months. If this is the sort of business model the automobile industry has to resort to in order to continue sales, we are in big trouble.

Then we have these few headlines pointing to a worsening U.S. economy:
• Restaurant Industry, Leading Indicator of US Economy Sours, Bankruptcies Pile up
• ESPN Loses A Record 621,000 Subscribers In One Month
• Greenspan: Western World Headed for a State of Disaster
• The Housing Market Is Waving A Red Flag

These are just some of the many headlines pointing to an economy and stock market that is not heading towards better times. It was interesting to read that ESPN lost 621,000 subscribers in one month. However, ESPN has lost over 15 million subscribers in the past five years.

Market Insanity Pushes The Dow Jones Up To Tulip Mania Heights

I wrote about the 17th century Holland Tulip Bubble in a previous article:
Nothing has changed since the 17th century Tulip Bubble that also destroyed the ability of people to act rationally. At the peak during the Holland Tulip Mania, some tulips were selling for 10 times the annual income of a skilled craftsman (Source: Wikipedia)

According to Wikipedia about the Tulip Mania:
…the growing popularity of tulips in the early 17th century caught the attention of the entire nation; “the population, even to its lowest dregs, embarked in the tulip trade”.[6] By 1635, a sale of 40 bulbs for 100,000 florins (also known as Dutch guilders) was recorded. By way of comparison, a ton of butter cost around 100 florins, a skilled laborer might earn 150 florins a year, and “eight fat swine” cost 240 florins.[6] (According to the International Institute of Social History, one florin had the purchasing power of €10.28 in 2002.[35])

As we can see from the chart, investors lose all economic and financial sense when asset prices start to go insane. Instead of using some restraint and wisdom, they drop all reason and jump in on the rising bandwagon.
Again, the worst time to get into a market is when everyone else is jumping in with both feet. I have updated my chart showing the increase in U.S. debt vs. the Dow Jones Index since the first quarter of 1980:

 

 

 

 

 

 

 

 

 

 

In 36 years, the Dow Jones Index and the U.S. debt have increased at the same exact ratio… 23 TIMES.

This is no mere coincidence. Investors who have parked their hard-earned money into market have placed their bet on stocks that are backed by nearly $20 trillion in U.S. debt.

So, there is a race for either the Dow Jones or U.S. debt to reach the 20,000 mark first. I put my money on the U.S. debt, which is only $100 billion away from that goal.

Furthermore, the U.S. Retirement Market is up 24 TIMES since 1980, and the S&P 500 is up nearly 21 TIMES. So, we can clearly see that the massive increase in debt has provided the HOT AIR that has pushed the stock market up to Tulip Mania heights.

Now, if we go back to 1929 when the U.S. was in another huge financial and economic bubble, the situation wasn’t as INSANE as it is today:

In 1929, right before the Great Depression hit, the U.S. debt was $17 billion versus a $105 billion Gross Domestic Product (GDP). Thus, the U.S. debt accounted for 17% of the U.S. GDP. If we fast forward to today, it is a much different picture.

The U.S. debt is now 105% of the U.S. GDP. Basically, the U.S. economy is powered debt… and a lot of it.

President-elect Trump may have grand ideas for the U.S. economy; however, his hands will be tied by the massive debt and terrible energy predicament overhanging the country.

According to the sources I have read, nearly 10% of U.S. oil production is being produced by either bankrupt or financially challenged energy companies. I also mentioned in a prior article that the largest oil company in the U.S., Exxon Mobil (NYSE:XOM), had to borrow $8 billion in 2015 to pay dividends or CAPEX. Number two Chevron (NYSE:CVX) had to borrow even more at $18 billion to pay dividends and CAPEX in 2015.

This is not a good sign for a healthy market to invest in.

Unfortunately, this will not stop more precious metals investors from selling their gold to play in the Dow Jones Casino. The reason to hold onto precious metals is to protect oneself when the FAN FINALLY HITS THE COW EXCREMENT.

Who sells their homeowner or automobile insurance to play in the stock market? This is how insane the mentality of investors has become.
While I have no idea of the timing of the U.S. Financial and Economic Crash, the wise thing to do is to make sure one holds onto their “Precious Metals Insurance.”

Last seen in 1929, in 2000, and 2008

Stocks have only been this expensive during the crash of 1929, the tech bubble of 2000, and the last financial crisis in 2008-09

My Comments: Economics 101 teaches us that owning shares of a stock means you own a piece of the company that issued the shares. It’s value on any given day is what someone else will pay you for those shares. That an offer by someone to buy your shares is based on what they think the shares will be worth in the future.

A way to measure the relative value of those shares to calculate the Price/Earnings ratio or P/E. This simply means that if I can buy another share for $20, and the earnings attributable to that share last year was $1, then the P/E ratio is 20:1. Simple isn’t it?

When you add in the historical norms for the industry to which your company belongs, and the general economic outlook going forward, you can make a decision whether to keep your shares, sell your shares or buy some more. Right now we are in deep water, far from land, and the boat is leaking.

by Bob Bryan | December 9, 2016

Stocks are getting a bit pricey.

All three major indexes break though their all-time highs on a seemingly daily basis, and this has pushed earnings multiples higher and higher.
The current 12-month trailing price-to-earnings ratio of the S&P 500 sits at 25.95x, while the forward 12-month price-to-earnings is roughly 17.1x, according to FactSet data. Each of these is higher than its long-term average.

In fact, based on one measure of valuation, the market hasn’t been this expensive anytime other than before a massive crash.

The cyclical adjusted price-to-earnings ratio, better known as Shiller P/E, which adjusts the price-to-earnings ratio for cyclical factors such as inflation, stands at 27.86 as of Friday. There have only been a few instances in history when stocks have been this expensive: just before the crash of 1929, the years leading up to the tech bubble and its bursting, and around the financial crisis of 2007-09.

This does not necessarily mean that a crash is imminent — during the tech bubble, the Shiller P/E made it well into the 30s before coming back down. Additionally, there are some criticisms that Shiller P/E is generally more backward-looking since it adjusts for the cycle, so it may not be as accurate.

Another caveat is that, during the three previous instances, investors have been incredibly bullish on stocks (there’s a reason Robert Shiller’s book is titled “Irrational Exuberance”) and most indicators of sentiment — from the American Association of Individual Investors to Bank of America Merrill Lynch’s sell-side sentiment indicator — are still depressed.

Still, an elevated level for the Shiller P/E certainly isn’t going to make it any easier to sleep at night.

There are two Donald Trumps and two very different market outcomes

moneyMy Comments: These could be described as exciting times. Personally, I’d prefer a little less excitement.

Patti Domm talks about comments made by a Bob Doll. Many years ago I met Bob when he was a senior player with a well known mutual fund company. He impressed me then and does today. You don’t reach his level of influence in this industry without serious chops, and he has them.

For those of you with money in the markets, whether in a trading account or simply money you are depending on for retirement, paying attention these days may mean peace of mind for you down the road.

Patti Domm – Thursday, 24 Nov 2016

Closely watched investing strategist Bob Doll says there are more reasons to like stocks since Donald Trump was elected president, and certainly fewer reasons to like bonds.

But Doll told CNBC that while stocks should be higher at the end of both this year and next year, there are still many unknowns about President Trump versus candidate Trump that could send the market into a tail spin.

“The main thing is we just don’t know. There will be a lot of trial balloons. For the market to have a serious problem, it’s going to have to be convinced the protectionist Donald Trump is showing up more than the growth Donald Trump. We elected both Donald Trumps, but I think the growth one is going to win out,” said Doll, chief equity strategist at Nuveen Asset Management.

Stocks have rallied since Trump was elected president in a surprise upset over Hillary Clinton. Trump’s promise of a big stimulus package, tax cuts and less regulation has boosted the dollar and triggered a selloff in the bond market.

“That’s part of the Trump rally. The markets assume we elected pro-growth Donald Trump. He was the guy who was going to cut taxes and roll back regulation, but he also talked about tariffs and tearing up trade deals — things that are anti-growth. Where did that president-elect go?” he said. “Part of the market going up is Donald Trump is not doing scorched earth on all kinds of stuff which he kind of implied he would while he was campaigning.”

Doll said some of the negative side of Trump could emerge, and that would cause a selloff in stocks and buying in bonds.

“I’m not convinced it’s a one-way street. We’ll get some of those days. Under the surface, the trend has changed. Whatever you thought about stocks before the election, you have to like them a little more, and whatever you think about bonds, you have to like them a little less,” he said.

Doll notes that the economy was already improving before the election, and rates were already moving higher. But the fact that Trump is trying to spur growth has made stocks more appealing, even in a rising interest rate environment.

“We don’t know what policies are going to pass or how long it will take to enact them, or how good they will be,” he said. Trump’s tax overhaul would be the first big tax cut package since the Reagan era, Doll said.

Stocks should continue to gain, and the bull market could be extended particularly if there is higher growth.

“We’re probably heading into a period where bonds go down and stocks are up — not tons, because the P/E rate is not going to go up if interest rates are going up,” he said.

As for the market’s performance next year, “the default would be we’re up some more and that’s my best guess, but I don’t know if it’s a lot or a little. There is more uncertainty … If he shuts the borders because the anti-trade Trump comes out, we’ll have a recession and the market will go down. If that side stays quiet and he cuts taxes, it could be up a lot,” he said.

The S&P 500 is about 3 percent higher since the election, and all major indices have hit new highs. The 10-year Treasury yield has risen as high as 2.40 from 1.80 percent.

The “Trump trade” has become the reflation trade, with investors buying cyclical stocks and selling bonds. Financials have benefited as well as industrials.

“Technically, we’ve come a long way in a short period of time. If you’ve got too many bonds and not enough stocks, maybe today is not the day to do the reversal. I would say any rally in bonds, you trim them, and any pull back in stocks and cyclicals, you buy them,” he said.

Doll said stocks should see a year-end rally. “With seasonality, more likely it’s going to be higher than where we are. I hesitate because we’ve run so hard for the last couple of weeks. Maybe we take a breath and then we come on with a year-end rally. I don’t know. But I can’t believe it would (go) straight up to the end of the year,” he said.

The stock market could see better gains with Trump as president than if Clinton had won the election, Doll said. Her policies were not so aimed at jump-starting growth, but during the election, the market did better when it was perceived Clinton was winning.

“The market was saying we like certainty, and we don’t like uncertainty and Donald Trump is more uncertainty than Clinton. There are going to be more good things and more bad things and we’re going to see what happens,” he said. “Underneath a lot of this, the economy is dong a little better and we can’t lose sight of that.”

Doll said there is a chance growth could be better, and that could also feed a rally.

“For the last few years, the search for yield, perceived safety and low volatility has been an investor’s dream, and billions and billions and billions have gone into those things,” he said. “That is over and done and it’s unwinding. That is because the economy is doing better and inflation is picking up a bit.”

Why the Stock Market Is Stacked Against Donald Trump

My Comments: I don’t think of myself as a woe and gloom person. I really want stocks and bonds to perform well and make money for my clients. That’s the ideal outcome for them and for me.

But as you’ve heard me say before, we do not live in a perfect world. And right now it’s far from perfect in terms of the markets and the opportunities for our investment portfolios to grow.

I wish I had a perfect answer, but I don’t.

by Shawn Tully | December 1, 2016

For a few golden weeks in November, U.S. stock markets loved Donald Trump. As this magazine went to press in late November, equities were in the middle of a record-setting rally that charged Wall Street pundits and strategists with a fresh sense of optimism. Market watchers at Goldman Sachs GS 2.54% , JPMorgan Chase JPM 1.98% , and Raymond James RJF 2.34% cited Trump’s pledge to roll back burdensome regulations and lower corporate tax rates as decidedly bullish for U.S. stocks.

But for investors who study the forces that govern stock prices long term, the outlook was no more upbeat after the election than it was before—and it was far from terrific. Put simply, equities are really, really expensive, and only became more so after Trump’s surprise victory. “The best predictor of future returns is whether you buy at low or high prices relative to earnings,” says Chris Brightman, chief investment officer of Research Affiliates, a firm that oversees strategies for $161 billion in mutual funds and ETFs. “Today individual investors and fund managers who expect the near-double-digit returns we’ve seen over history will be sorely disappointed.”

James Montier, a value investor at asset-management firm GMO, provided this dim appraisal of U.S. stocks: “This is a hideously expensive market, and I don’t need to own it.”

Take a deeper dive into the thinking of pessimists like these, and it’s hard not to reach similar conclusions. (More on that in a moment.) Fortunately, investors can garner much bigger rewards by looking beyond the super-rich American market and beyond stocks in general. This is the time to take a broad, venturesome view encompassing all the best—meaning mainly the cheapest—places to put your money.

As we’ll see, spreading your portfolio across a broad range of underpriced assets can add crucial percentage points to your returns. Best of all: If you do it thoughtfully, you can improve your odds while shouldering little or no extra risk.

Go Abroad

Chris Brightman, chief investment officer of Research Affiliates, thinks that a foreign-centric stock portfolio could outperform a U.S.-only portfolio by as much as three percentage points a year over the next decade.

Play Inflation
Rising inflation could be a mixed blessing for stocks. But it’s good for investors in floating-rate bank loans (whose interest payments rise with inflation) and TIPS, Treasury securities whose principal rises with consumer prices.

Collect a Check

When stock price growth is sluggish, dividends account for a much bigger share of investors’ gains. The problem: Dividend-paying stocks are historically expensive right now.

Let’s examine why the near future for U.S. stocks looks downbeat. Over the past 100 years, the S&P 500 has delivered average annual returns of 9.6%. Wall Street optimists and many pension fund managers believe that past is prologue and that equities will continue to deliver those historical returns. But it won’t happen for a while for one reason: On average the folks who pocketed those nearly double-digit gains in past decades were buying at far lower prices than the big valuations prevailing today.

Here’s why the market math is so daunting. When you purchase a broad swath of equities, say an S&P 500 index fund, the returns you can expect over the next decade or so comprise four building blocks: the starting dividend yield, projected growth in real earnings per share, expected inflation, and the expected change in “valuation”—that is, the expansion or contraction in the price/earnings (P/E) multiple.

Let’s start with the first building block: the dividend yield. The main reason high prices foretell paltry gains is that rich valuations make dividend yields smaller. It’s dividends that have provided the richest rewards to investors. Since 1871, the S&P dividend yield has averaged 4.9%, though it has been lower in recent decades.

The problem is today’s highly elevated P/E ratio. The P/E of the S&P 500 stands at 24; that’s well above the average of 16 over the past century, and 19 since around 1990. Big U.S. companies, on average, pay out half their earnings in dividends. But because the “P” is so towering, you get far fewer dollars in dividends for every dollar you pay for stocks. Today the S&P dividend yield stands at a slim 2%.

So how much will the second building block—real growth in earnings per share—add to that weak yield? In today’s bluebird forecasts for stocks, the biggest fallacy is highly inflated expectations for earnings. “Since the mid-1980s, profits have grown at unusually high rates, giving rise to the mistaken idea that we were in a ‘new normal,’ ” says Brightman. “Earnings rose to a historically high share of national income that they couldn’t possibly sustain.” In fact, the inevitable decline has already begun. S&P profits, based on trailing earnings per share over the past four quarters, peaked in September 2014 and have dropped by 15% over the past two years.

Although earnings careen in a zigzag pattern from year to year, their trend stretching over long periods is remarkably consistent. U.S. profits expand with the overall economy, growing at an annual clip that has exceeded 3% over the past century. But what matters to investors is earnings per share, what they’re effectively receiving in dividends, buybacks, and reinvested profits that drive capital gains. And it turns out EPS expands at just half that rate, or around 1.5%, adjusted for inflation.

The reason for the big lag is twofold. First, companies constantly issue new stock to reward executives and make acquisitions, and the new issues far exceed buybacks. Those extra shares dilute the portion of profits flowing to existing shareholders. Second, new enterprises, often funded by IPOs, invade their markets and reduce the incumbents’ share of the industry’s profit pie. “Profits can grow above trend for certain periods, but they’re still elevated,” says Brightman. “The best assumption is that they grow at the historical real rate of 1.5%.”

To sum up so far: A 2% dividend yield, plus the 1.5% projected EPS growth, should deliver a future real return of 3.5% a year for the next decade. Add the third building block, the approximately 2% inflation predicted by the Fed, and the total expected return on big-cap U.S. equities comes to just 5.5%.